Why Bitcoin Can’t Be Money

Everyone is talking about bitcoin, even people who otherwise know little about investing. That’s probably a bad sign for bitcoin.

Recently, I had a conversation with my 89-year-old father. He likes reading newspapers, so this year I got him a Wall Street Journal subscription. Now he’s up on the financial news.

A few weeks ago, he asked the big question: “What is bitcoin?”

I told him what I knew: Bitcoin is a digital currency, designed to be scarce, anonymous, and secure, that it’s price has gone vertical, that some people think it will one day replace dollars.

He was with me until that last part. A private, digital-only currency didn’t make sense to him.

I pondered that conversation driving home… and I think he was right. Bitcoin may be useful and valuable, but it won’t replace fiat currencies anytime soon.

Photo: Getty Images

Power Mining

Before we talk about bitcoin, I want to let you know that our Mauldin Economics VIP offer is still open until December 13. VIP gives you access to all our premium investment services, including my own Yield Shark and Macro Growth & Income Alert, for one low price. It also comes with some other perks—get all the details here.

Now, on with our topic.

Unless you’ve been hiding under a rock, you know bitcoin prices have gone bananas. I’m not even going to quote any numbers. Anything I say will be laughably wrong by the time you read this.

Could some virtual currency that only exists on a computer screen really be worth these crazy prices?

Maybe. If you think it will become a major medium of exchange, bitcoin is far underpriced.

That’s a big “if” we’ll discuss in a minute. First, let’s look at some more practical issues.

Bitcoins enter the digital world when someone “mines” them by solving certain math problems. Mining operations have turned from college students sitting at their laptops to huge enterprises that use massive computing power to run ever more complex math calculations. Some of the computers dedicated to solving those math problems fill entire buildings.

Photo: Getty Images

Bitcoin’s anonymous inventor, who called himself Satoshi Nakamoto, built scarcity into the system. Mining gets more difficult as time passes and the supply increases. No one will ever hit a mother lode and double the bitcoin supply overnight.

As the math gets more complicated and the computers have to work harder, bitcoin mining consumes an increasing amount of electricity. And that’s starting to be a problem.

In Venezuela, where rampant hyperinflation and subsidized electricity has led to a boom in bitcoin mining, rogue operations are now occasionally causing blackouts across the country. The world’s largest bitcoin mines are in China, where they siphon energy from huge hydroelectric dams, some of the cheapest sources of carbon-free energy in the world. One enterprising Tesla owner even attempted to rig up a mining operation in his car, to make use of free electricity at a public charging station.

That’s pretty crazy, but it gets crazier.

In just a few months from now, at bitcoin’s current growth rate, the electricity demanded by the cryptocurrency network will start to outstrip what’s available, requiring new energy-generating plants. And with the climate conscious racing to replace fossil fuel-based plants with renewable energy sources, new stress on the grid means more facilities using dirty technologies. By July 2019, the bitcoin network will require more electricity than the entire United States currently uses. By February 2020, it will use as much electricity as the entire world does today.

This is an unsustainable trajectory. It simply can’t continue.

Not to put too fine a point on it, but this is bonkers.

I have not independently verified these claims. In the comments section at the bottom of Eric’s article, many expert-sounding people dispute them. So maybe he’s wrong.

Your dollar bill is legal tender for all debts, public and private. The government says everyone must accept it, so we do.

Nothing prevents us from accepting other currencies as well. You can trade chickens for cows, or vice versa, if everyone agrees. But you’ll still have to report any taxable gain in dollar terms and pay tax in dollars. That’s the “public” part of the legal-tender legend.

In the modern world, governments define money because they have the raw power to define how you must pay your taxes. They can and will use force to make you pay—and deadly force if you resist too hard.

The IRS doesn’t accept cows, chickens, yen, gold, or bitcoin. It demands dollars. Don’t have any? Get some or go to prison.

Photo: Getty Images

As long as we pay a significant part of our income in taxes,

We must all own whatever currency the government accepts as payment, in quantities sufficient to pay our tax obligations.

Business accounting must use government-dictated currency as the unit of account.

That means most people will default to using the same currency for personal spending and investing. This gives government-issued money an automatic advantage over bitcoin or any other competitor.

When national governments start accepting bitcoin for tax payments, you can fairly call it “money.” Until then, it’s simply another risk asset like gold, stocks, or pork bellies.

Is bitcoin a risk asset you should own? Probably not, unless you are prepared for some serious pain whenever the price heads south.

I don’t know when that will happen. Bubbles get way bigger than anyone thinks possible, but at some point, they all pop. This one will too.

See you at the top,

Patrick Watson

P.S. If you’re reading this because someone shared it with you, click here to get your own free Connecting the Dots subscription. You can also follow me on Twitter: @PatrickW.

Senior Economic Analyst Patrick Watson is a master in connecting the dots and finding out where budding trends are leading. Patrick has partnered with John Mauldin as the co-editor of Mauldin Economics’ premium research service, Over My Shoulder. Together, they curate research and analysis from the world’s finest thinkers, and deliver it to subscribers 3–4 times per week. You can also follow him on Twitter (@PatrickW) to see his commentary on current events.

Discuss This

Comments

themistocles2010-2020@yahoo.com

Dec. 12, 2017, 3:08 p.m.

Some thoughts:

The bitcoin blockchain is transparent to many thousands of eyes, ensuring trust.
Money is what people accept as money. People trust bitcoin as money.
There is an upper limit to the total number of bitcoins, guaranteeing scarcity.
Bitcoins can easily be broken into smaller parts (‘bitdust’).
Fractional bitcoins can easily be re-assembled into whole bitcoins.
Bitcoins are immediately and easily convertible to and from dollars, yen, rubles, etc.
Exchange costs are much lower, and much easier than other currency transactions.
The number of merchants accepting payments in bitcoins is rapidly rising.
Bitcoins are very easy to move; rising demand from China impacts the bitcoin supply.

The only real threat is from governments—which would have to act in unison to control the internet, in order to shut down bitcoins. But to do that, governments would have to become thoroughly despotic and heavy-handed. Much easier to simply accept dollars for tax payments, no? The market will take care of the exchange rate.

People do not trust fiat currencies. Economists, money managers, companies, households, and individuals must all take inflation into account; they are forced to guesstimate the future rate of inflation. Not so with bitcoin, which is neither inflationary nor deflationary, since there is an upper limit to their total number. Thus, the bitcoin supply is a trusted number.

A quality of money that is wrongly minimized is scarcity. That quality, plus ease of trade and the willingness of society to accept something scarce for payment, creates what we call “money”. Gold isn’t more useful than various other metals. Its primary use as money is the fact that it is scarce. But unlike bitcoin, gold is difficult to exchange and expensive to store.

Likewise for fiat currencies: of what use is paper money, other than as an accounting tool for the exchange of goods and services? The one quality all money has is *scarcity*. But governments have misused that scarcity, by inflating the money supply as a hidden tax. And without exception, that hidden tax (inflation) eventually gets out of control. Thus, bitcoin fills a growing need: as a store of value that cannot be corrupoted by governments.

The bitcoin market that is being created right now already supersedes any local government’s ability to deal with it. And if left alone, the total bitcoin supply will eventually equal the total net worth of the world’s total goods and services.

Economist J. Schumpeter called this process “creative destruction.” Bitcoin will destroy fiat currencies. Get ready for the ride.

brittp655@comcast.net

Dec. 12, 2017, 11:02 a.m.

I see price instability as the biggest fail as a currency. I certainly would NOT pay bitcoins for any current purchase and certainly would NOT accept any when the downturn comes. (and it will.) Pure speculation is driving this run-up. Someone please explain why this isn’t a tulip.

Robert Monical

Dec. 12, 2017, 10:22 a.m.

I get about 1.5 GW to power the bitcoin network today using the latest technology. China produces 6,000 Terawatts and the world produces 25,000 Terawatts. I cannot figure out how some folks are getting crazy numbers.
Me: 15 million terahash in the bitcoin network today. Antminer S9 produces 13.5 terahash at 1300 watts. 1.2 million required to support the network - 1.5 Gw

mdmcmd@saw.ca

Dec. 12, 2017, 10:17 a.m.

Patrick, I think you’ve missed a significant point. I do not need any physical money (currency) to earn money nor to pay the taxes on what I earn. Apart from small local exchanges I never see or touch currency. The official currency is less than cryptocurrencies in this sense. They issue tokens of various kinds that I can see and feel - at least as real as the official currencies. Your argument seems to be based on this “legal tender” idea. However, no one needs to actually see the bills to do transactions of any but the tiniest sizes. Hence, according to your own argument, bitcoin can be money as easily as US dollars. I expect some day both will go the way of all currencies. The really interesting bit of your article is the energy use and how that will continue to be economic. Maybe new money for new energy technologies? Thanks for the article. Even though I don’t agree with your logic, I appreciate it as an informative thought piece.

Robert Monical

Dec. 12, 2017, 10:15 a.m.

I agree that bitcoin is not currency. I liken it more the $450 million possibly counterfeit Da Vinci. Now to mining. The current “hash rate” of the bitcoin network is 15 million terahash. The most modern miner - the AntMiner S9 hashes at the rate of 13.5 Terahash and a power consumption of 1300 watts. Obviously, the network has a lot of older less efficient miners. So in round numbers I get 1.2 million S9s to service the network. That is about 1.6 gigawatts. Worldwide generating capacity is about 25,000 Terawatts with China leading the way at 6,000 terawatts.
BTC Hashrate: https://blockchain.info/charts/hash-rate
S9 specs: https://www.cryptocompare.com/mining/bitmain/antminer-s9-miner/
World Electricity: https://yearbook.enerdata.net/electricity/world-electricity-production-statistics.html

Francis Paine

Dec. 12, 2017, 9:22 a.m.

Patrick, your article re bitcoin was very interesting, especially what you had to say about power consumption. Thank you. I wonder, though, about your power consumption assumptions. If you are right, then bitcoin is facing a really serious problem, but if the power consumption assumptions are wrong, the unwinding may take a much longer time. You touch on another point, though, that is definitely real. I am hearing over and over from people calling themselves investment professionals that my portfolio absolutely MUST include some bitcoins or other digital “currencies”. They are arguing that because the price has exploded, it absolutely MUST continue higher. That’s an ancient argument that has been proven false many times in history. Remember the tulip bulbs we heard about in high school? I bet these guys are touting the asset at the same time that they themselves are going short. I say watch out!

DAVID WEBB 35412

Dec. 12, 2017, 9:16 a.m.

I look forward to the article you write trying to explain how wrong you were about bitcoin.

Of course, I have waited since the market was in the mid 6000’s for John to finally “like” it, but all the way to 24,000 he has only disliked it.

So I won’t hold my breath.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Yield Shark, Thoughts from the Frontline, Outside the Box, Over My Shoulder, Transformational Technology Alert, Rational Bear, The 10th Man, Connecting The Dots, Stray Reflections, Street Freak, ETF 20/20, Macro Growth & Income Alert, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC. Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

Mauldin Economics has affiliate agreements in place that may include fee sharing. If you have a website or newsletter and would like to be considered for inclusion in the Mauldin Economics affiliate program, please go to http://affiliates.ggcpublishing.com/. Likewise, from time to time Mauldin Economics may engage in affiliate programs offered by other companies, though corporate policy firmly dictates that such agreements will have no influence on any product or service recommendations, nor alter the pricing that would otherwise be available in absence of such an agreement. As always, it is important that you do your own due diligence before transacting any business with any firm, for any product or service.